Gas-to-Power: Upstream Success Meets Power Sector Growth
So far in 2016, nine of the top twenty global hydrocarbons discoveries have come from Africa, with six of the nine being gas discoveries. Even frontier markets, which have become a far less favorable proposition in the low price, low risk-appetite environment, have yielded results, with US firm Kosmos appraising a ‘super-major’ scale gas discovery offshore Mauritania and Senegal. Despite this, significant power challenges remain across sub-Saharan Africa, in terms of both ensuring widespread electricity access and improving capacity. The result has been tough times for African industry and slower progress toward the continent’s development goals.
The task of mapping a path from the present scenario, in which Africa continues to enjoy upstream successes, to an ideal scenario, one in which resource abundance leads to vastly improved electrification rates and fewer power outages, would be hard at the best of times. Harder still as resource dependent economies (and their elected officials) negotiate a protracted hydrocarbon down-cycle. Nevertheless, private sector and national investors are perceiving worthwhile opportunities in the gas-to-power space, from LNG regasification to consortium-backed IPPs. This report reviews the array of factors impacting gas-to-power development, while highlighting examples of bold investment and the outlook for monetizing upstream resources.
Widespread energy deficits and routine power outages are not congruous with Africa’s social and economic development goals. Despite decades of policymaking to develop the power sector, progress has been shockingly sparse: Africa’s total electricity generation in 2015 was three quarters that of Japan, despite having nearly ten times the population. Total power capacity across the continent, currently 147 gigawatts (GW), is equivalent to the total additional capacity installed in China every 12-24 months. And, according to the 2015 Africa Progress Report, it would take the average Tanzanian eight years to consume as much electricity as an American uses in one month.
The scale of the challenge demands solutions of similar size and ambition. The International Energy Agency (IEA) predicts that Africa will require more than $30 billion in annual investment to achieve universal worldwide access to electricity by 2030. A crude estimate suggests sub-Saharan Africa will require nearly half that sum. The International Renewable Energy Association (IRENA) claims the figure is at least $27 billion in annual investment across sub-Saharan Africa, if renewable energies are included as part of the energy mix. However, even in the most hopeful forecast scenarios for renewables, IRENA still sees an important role for natural gas as the fuel to power the continent through to 2030 and beyond. The facts on the ground leave a number of region-specific opportunities for gas and power investors, but these are not without their share of challenges.
Capacity challenges call for IPP structure
In Nigeria, a high share of the continent’s proven gas reserves has not yielded the access to electricity one might expect. Less than half of Nigeria’s 96 million inhabitants are able to access electricity readily via the national grid. This compares with 72 percent in Ghana and 55 percent in Senegal. The discovery of additional gas offshore Senegal and Mauritania, estimated at 450 billion cubic metres (bcm), was announced by US firm Kosmos in January 2016, prompting Senegal’s energy ministry to predict a future of energy self-sufficiency and net gas exports. UK-listed oil and gas explorer, Cairn Energy, has also proven gas in a previously undrilled deepwater structure offshore Senegal, encountering two gas-bearing reservoirs. In both cases production is not imminent.
Natural gas-fired thermal plants sustain 50 percent of the region’s grid-connected capacity, with more than 90 percent of capacity coming from Nigeria, Ghana and Ivory Coast, according to IRENA. Current grid-connected capacity trails demand, and consumers in countries such as the Ivory Coast, where the electrification rate is just 26 percent, are using diesel generators to plug the deficit. Nevertheless, demand and tariff imbalances between these countries have led to the improbable situation of Ghana importing energy from its Ivorian neighbors on occasion. The issue of energy deficits has occurred despite regional cooperation on the West African Gas Pipeline project (WAGP), a 678 km offshore pipeline traveling East (from Nigeria) to West (Ghana) through Benin and Togo. Eighty-five percent of the purified natural gas is used for power generation, but Ghana’s failure to meet cash calls over the course of early 2016 led to the suspension of gas flows in July.
According to the IEA, a lack of investment financing is one of the major barriers to expanding power capacity. Domestic political pressures have, until recently, ruled out meaningful electricity tariff increases across the region, as citizens demand ever more affordable energy during the economic slowdown. The result has been dampened interest from electricity sector investors who fear they will not recoup their costs or are not impressed with the margins on offer. Nigeria has shown the path to progress.
In 2015, the Nigerian Electricity Regulatory Commission increased electricity tariffs for commercial, industrial and residential energy users. The combination of higher tariffs and the offer of a $492-million equity investment guarantee (provided by the World Bank’s Multilateral Investment Guarantee Agency), helped secure the commitment of an international consortium, to build and operate a 459 MW IPP, known as Azura IPP. The project, which will make use of Nigerian gas, also includes an undertaking to construct surrounding infrastructure and will serve 12 million residential energy consumers, according to the World Bank. The total cost of Nigeria’s first wholly project-financed IPP is estimated at $900 million and in the event of its success, the IPP model along with a similar financing structure could prove an attractive and transferable model for other investors.
China offers large-scale and integrated investment
Governments are in need of large-scale power solutions to keep pace with electricity demand growth. Using current and proposed energy policies as a basis, the IEA forecasts that electricity demand in sub-Saharan Africa will grow by more than 300 percent, reaching nearly 1,300 terawatt hours (TWh), outpacing the expected rate of annual GDP growth to 2040. The need for additional generation capacity is being met in part through China’s sustained, large-scale investments. Across the range of all projects completed, under construction or planned, the average size of Chinese power projects is 188 MW, but can be as large as 1250 MW, according to IEA data. The same data set shows that between 2010 and 2020, an expected 17 GW of additional power generation capacity will come through Chinese projects, equivalent to 10 percent of existing capacity in sub-Saharan Africa.
A range of Chinese stakeholders are taking part in providing integrated solutions, incorporating fuel supply infrastructure, generation, transmission and distribution. Often these stakeholders are backed by the Chinese state, which unlocks access to government-led equity financing and national development assistance in the form of public loans, via the Export-Import Bank of China. China’s highly optimised logistics also mean costs of production are competitive, but Chinese contractors have in the past left themselves open to the criticism that they do not leave adequate room for national content, in terms of local suppliers.
China’s Shenzhen Energy Investment Co (SEICo) is a prime example of an integrated investor acting as financier, contractor and operator across the electricity value chain. In 2007, SEICo and the China-Africa Development Fund became joint venture partners in a Ghanaian project, investing $200 million of equity to build a gas-fired power plant with an installed capacity of 200 MW. The project, known as the Sunon Asogli Power plant, is located in the coastal city of Tema, 25 km east of Accra, and is supplied with gas from Nigeria through the West African Gas Pipeline. The plant is also connected to existing gas-fired plants run by Volta River Authority, the national generator and supplier of electricity in Ghana. Following completion of the first phase in 2010, an additional phase was launched in 2015, with the aim to improve capacity to 560 MW using European CCGT technology. The project, which was slated for completion in 2017, was complete by April 2016 and took the total cost of the development to $560 million, according to the IEA. In the long run, Ghana’s own gas may be able to supply the plant, creating the possibility that the investment could reduce dependency on imports in the long-term and create an additional monetization option.
China is the clearest possible example of a state investor committed to investing at scale and across the energy value chain in order to bring gas-to-power solutions. However, other state-backed entities with deep pockets, in India for example, have demonstrated their ability to tie-in lines of credit, cost-effective supply chains and upstream integration to bring solutions across a number of African industries. Whatever the terms of trade, the challenge for African countries in need of power sector investment is to negotiate in favour of local content, technology transfer and sustainable rates of finance.
LNG offers supply and commercialization
Following the delivery of a number of successful projects around the world, African policymakers and energy investors are taking notice of LNG as a potential source of fuel for local IPPs. The advent of LNG-to-power technologies has made gas-to-power projects feasible for those African countries which do not have a domestic supply of natural gas or access to a natural gas pipeline network to import natural gas. Per kilowatt hour, LNG costs less than liquid fuels such as diesel, though governments will have to square this off against other costs, such as environmental impact, when compared to other energy sources.
A major consideration for LNG-to-power projects and the associated infrastructure, is adopting the appropriate financing and development structure. Reporting to the Africa Energy Forum 2016, the global law firm Ashurst apprised potential investors of the potential risks: LNG-to-power projects, they said, “are altogether more complex and require a number of additional risks to be considered and allocated, including potentially flowing various risks through a much longer project contract chain.” The central question is: What technological and contractual linkages need to be developed between the primary LNG importation stage and the regasification and power infrastructure? For plugging energy deficits in the short term, perhaps in smaller markets, a floating storage and regasification facility (FSRU), costing between $300- $550 million to build, according to Bloomberg estimates, might be ideal. This cost is approximately half as much as an onshore import terminal, and the project time horizon, which is typically two years, means the overall timeline and the capex commitment are less vulnerable to electoral cycles. Naturally, the correct project structure and approach will be different for each set of market conditions and will depend upon a blend of economic, legal, technical, geographic and political influences.
South Africa’s Department of Energy (DoE) has solicited procurement bids for a 3,126 MW LNG-to-power IPP. Having completed feasibility studies for each of the proposed port locations, which will be adapted to incorporate LNG import terminals, the DoE has called for the first phase of the LNG-to-power programme to focus on identifying suitable bidders for the full provision of LNG supply, FSRUs, the associated port facilities, and gas transmission pipelines at two separate ports – Coega and Richards Bay. LNG World News, an online industry news source, reported that Eskom, South Africa’s power utility, will purchase the electricity generated by the gas-fired plants and that bidders will need to be in a position to develop, finance, construct and operate the facilities.
South Africa is not alone in exploring LNG-to-power, though it is far ahead of its counterparts in terms of the scale of its LNG ambitions. According to one DoE estimate, South Africa could be importing in excess of 3 million tonnes a year of LNG by 2018. Looking elsewhere, in Morocco for example, the development of LNG import and pipeline infrastructure is also being mooted. Egypt has chartered two FSRUs and will possibly charter a third, according to the IEA, while, in Ghana, potential investors are assessing a phased approach to a 1300 MW LNG fuelled CCGT plant.
Major Gas Discoveries (January-June, 2016)
In East Africa, recent gas exploration has yielded success on a global scale. Tanzania is now estimated to have more than 50 trillion cubic feet (tcf) of gas reserves, nearly one tenth of Africa’s proven resource. The figure includes the most recent onshore discovery, announced by the UAE-based Dodsal Group in February 2016, of 2.7 tcf of gas in the Ruvu Basin Coast Region. In Mozambique, estimates of the offshore gas reserve vary between 100 and 180 tcf, following the successes of upstream specialists Anadarko and Eni SpA in the Rovuma basin’s Area 1 and Area 4, respectively. Though recoverability remains an issue for these gas giants, so too does monetisation. While constructing LNG trains remains the primary strategy, the required investment is sizeable. According to analysis by Standard Bank, the cost of constructing four LNG trains with a combined annual capacity of 27 billion m3 by 2020, is circa $40 billion, rising to $54.6 billion if six trains are built. These CAPEX requirements, the report claims, are consistent with an internal rate of return (IRR) of 12.2 percent for the Area 1 project (led by Anadarko), assuming a gas price of $12/million Btu. In July 2016, Bloomberg reported acquisition interest from Exxon Mobil in both Area 1 and Area 4 discoveries. A minority stake purchase by the US super-major could accelerate the development of the LNG projects. However, as KPMG’s ‘Oil and Gas in Africa’ report notes, the prospects for Tanzania’s LNG industry may suffer if Mozambique’s development pulls much further ahead: “it is still unclear whether global demand will justify another LNG project from south-east Africa.”
While there are no doubt challenges to meeting Africa’s energy needs, from a lack of infrastructure to a desperate need for liquidity, these needs mean there are a plethora of opportunities for investment. Additionally, many of the continent’s infrastructure needs and the bountiful gas reserves lend the region to a gas-to-power scenario, with LNG projects especially picking up steam. As governments continue to make headway in opening their countries to foreign investment, especially in creating open regulations for IPPs, we will see Africa continue to power up.
Waste not, want not
Despite energy shortages throughout sub-Saharan Africa, there is significant room for improvement when it comes to resource management. Currently. Africa’s operators release an estimated 35 bcm of natural gas into the atmosphere each year through flaring, with Nigeria responsible for close to 100 percent of the emissions. The annual waste accounts for anything up to $3.75 billion on typical prices, a sum capable of contributing significantly to Nigeria’s proposed $30.6 billion stimulus budget, and a volume of gas which accounts for more than a quarter of Africa’s natural gas consumption, based on figures from the BP Statistical Review of Energy 2016. Globally, 350 million tonnes of carbon dioxide emissions are attributed to worldwide gas flaring, and in 2012 a joint study by the European Commission and the Netherlands Environment Assessment Agency reported that just four African countries produced 18.7 percent of CO2 emissions from gas flaring. Aside from the dire environmental consequences, poor resource management is contributing to slower expansion of gas-to-power infrastructure, exacerbating the problem of power outages and slowing down economic activity. Nearly 5 percent of all sales lost by businesses in sub-Saharan Africa are due to power outages, according to the World Bank’s enterprise survey, with 38 percent of firms identifying electricity as a major constraint to successful and efficient operations.